Fulfillment: Rage Against the Machine

Many CFOs barely look at E-fulfillment; most delegate the task entirely to executives in customer service or logistics. The result is not just angry customers, but a slower cash conversion cycle that eats away at working capital and profit margins.

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The idea of selling groceries over the Internet has always been a bit of a puzzler. Why would anyone with any degree of sanity take a business with paper-thin margins and wed it to a costly fulfillment system? Prospects for profitability would seem, at best, dim. And in fact, online grocers-once trumpeted as future stars in the new economy-have stumbled badly of late. In April 2000, for example, Netherlands-based Royal Ahold (www.ahold.nl) acquired a 51 percent stake in struggling cyber-grocer Peapod (www.peapod.com) for $73 million. Then in October, Priceline.com (www.priceline.com) announced it was shutting down its online grocery operation.

All this doom and gloom begs the question: What’s up with Robert Swan? Swan, CFO and COO at online grocer Webvan Group Inc., remains undeterred by the recent troubles in the industry — even though the Foster City, California-based company lost $74 million in the second quarter of 2000. More remarkable, the redoubtable Swan insists he can raise the operating margins at Webvan to 12 percent — or four times that of land-based grocers.

A neat trick — if Swan can pull it off. Webvan’s bold strategy — and perhaps the company’s survival — depends on the E-tailer’s ability to serve a maximum number of customers while wringing every drop of revenue out of its fulfillment and delivery systems. Swan says that at full capacity, each of Webvan’s distribution centers could fulfill 8,000 orders per day, seven days a week, at an average $103 per order. A tall task. To make sure Webvan is moving toward its targets, Swan watches fulfillment data like a hawk. “CFOs must drive operational performance to meet financial goals,” he explains. “Therefore, I monitor the fulfillment operation on a daily and hourly basis.”

The Search for Fulfillment

Oddly, CFOs at many click-and-mortar operations barely look at E-fulfillment performance, let alone track it by the hour. In fact, most finance managers don’t monitor the delivery of online goods at all, choosing instead to let executives in customer service or logistics handle the chore.

But as executives at pure-play E-tailers know, passing the fulfillment buck is playing with fire. Typically, a fulfillment system is the largest capital outlay an online merchant makes. Without reliable data, it’s hard to analyze the return on the investment — a big blind spot. “Fulfillment is a huge spend,” says Ted Augustine, chief logistics officer at Santa Monica, California-based eToys Inc. (www.etoys.com). “It has to be very closely monitored and managed.”

Note that eToys, which pays considerable attention to delivery of merchandise, is still in business. (In early 2001 eToys announced that it will shut down its operations.) Analysts say a poorly managed fulfillment system severely undermines an online operation — no matter how good the products are.

“Fulfillment is part of customer service,” notes Geri Spieler, California-based research director of e-Business Services at research firm Gartner (www.gartner.com), based in Stamford, Connecticut. “Merchants lose customers more from bad customer service than from any other reason.” And to online shoppers, a delay in receiving an order definitely qualifies as bad customer service. In some cases, Spieler says, “[fulfillment] problems have forced enterprises to shut down their Web sites.”

Even when an E-tailer manages to hold on to customers, inefficient fulfillment systems can slow down the company’s cash conversion cycle, effectively eating away at working capital and profit margins. “Every second a product that could be shipped out sits in a distribution center is money down the drain,” notes Stacie Kilgore, senior analyst for ebusiness applications at marketing research firm Forrester Research Inc. (www.forrester.com), in Cambridge, Massachusetts.

By contrast, a well-oiled fulfillment system not only maximizes inventory churn, it also keeps customers happy, generates return business, and therefore plumps up a company’s top line. “Fulfillment may be a company’s biggest cost,” Kilgore grants, “but the real opportunity is to look at fulfillment from a revenue-generating perspective.”

Looking at it at all would be good. At Webvan’s cavernous Oakland, California, distribution center, the company’s intricate order management system automatically pushes items needed for each order in plastic totes (identified via bar-coded license plates) to stations via 4.5 miles of conveyor belt. At the stations, pickers receive the correct items and place them in the plastic totes to fill the order. To meet performance goals, each picker has to pick more than 100 items per hour. If everything runs smoothly, one worker can pick 16 orders simultaneously.

When pick rates lag for a particular product, Swan’s team goes online and modifies the placement of the product in the Oakland distribution center. If the change yields better performance, Swan makes the same adjustment for Webvan facilities in Sacramento, Atlanta, and Chicago. “I make tweaks all the time,” explains Swan. “I check the demand on various SKUs. It affects profitability on a minute-to-minute basis.”

For an online grocery like Webvan, delivering goods with all due speed is not just a good idea-it’s a necessity. “Food is highly perishable,” explains Kilgore. “If it sits on a rack too long, you don’t just discount it, you have to write it off altogether.” Compounding the problem: Webvan delivers products in its own fleet of trucks, which makes fulfillment more complex. Therefore, Webvan managers meticulously choreograph every step in the value chain — from the receipt of goods from suppliers to directing merchandise to the picker’s station to the automatic planning of routes for company truck drivers in local neighborhoods.

Forrester’s Kilgore says Webvan’s diligence — particularly in managing its inventory forecasting — is unusual. “Most companies review inventory reorder points or demands trends on a six-month or yearly basis,” she says. “Companies that don’t change their forecasting mechanisms on a daily basis — as Webvan does — are unprepared for sudden changes in demand for certain items. By the time they review inventory trends to tweak their sourcing, the picture has changed dramatically.”

That lack of real-time data has led countless E-tailers to book orders for products that are out of stock — or worse, discontinued. Such miscues can permanently tarnish an E-tailer’s reputation, sending irate customers to competitors. “Fulfillment is the name of the game,” Swan says flatly. “It will make us or break us.”

Attention Shippers

You don’t have to sell eToys’ Augustine on the merits of fulfillment management. As chief logistics officer at the online toy seller, Augustine is fully aware of the importance of shipping merchandise in a timely fashion. “This isn’t a business in which you want to deliver a product three days after someone’s birthday,” he says.

Since there is little existing fulfillment data — or time to benchmark other E-tailers’ shipping performance — eToys relies on veteran logistics managers to set targets and gauge performance. “Our people have a broad range of experience, from steel to fast food to computer products and components,” says Augustine, who is the former head of logistics at Gateway Inc. The logistics department at eToys has set high standards, too. The company endeavors to ship most products within 24 hours of receipt of the order.

To make sure the online toy seller meets that goal, management employs a team of industrial engineers to oversee the E-tailer’s distribution centers in Ontario, California, and Danville, Virginia. The logistics department also conducts time-use studies, which Augustine believes are more valuable than benchmarking the fulfillment performance of other companies. Webvan also relies on internal benchmarking of its inventory and distribution systems. “We follow the best practices of our people,” says Swan, “many of whom have been in pick environments before.”

Moreover, managers at E-tailers like eToys and Webvan have learned hard lessons in the dotcom wars, which may be why they’re more adept at managing ecommerce fulfillment than many click-and-mortar operators. Interviewed for an article in an earlier issue of eCFO, eToys CFO Steve Schoch argued that pure-play E- tailers are further along the fulfillment learning curve than old-economy managers: “We are in a unit-based business,” Schoch noted. “But [traditional retailers] are used to moving pallets. None of the assets of land-based companies are appropriate for running an Internet operation.”

A number of old-economy retailers have been slow off the ecommerce mark, that’s for sure. Retailing giant Kmart Corp. is one. The Troy, Michigan-based company’s Web site, BlueLight.com (www.bluelight.com), ran into some operational snags early on and didn’t relaunch until June 2000 — well after most E-tailers and even some traditional businesses had put up virtual stores. Playing catch-up meant BlueLight.com didn’t have time to develop its own fulfillment operation before going live. So managers at the San Francisco-based online retailer outsourced the company’s order fulfillment to SubmitOrder.com (www.submitorder.com).

That adds yet another layer of complexity in fulfillment management. So, too, does a whopping increase in business. According to Chris Lien, BlueLight’s chief financial officer, the company is forecasting more than half a million SKUs by Christmas — somewhat more than the 80,000 the cyber-store has now. And as some E-tailers discovered in the 1999 holiday season, such an explosion in volume can overwhelm a fulfillment system.

Nevertheless, BlueLight.com is setting some high standards for fulfillment. “We’re looking to model ourselves after an Amazon-level customer experience,” Lien says. In other words, most items should ship within one to two days of order.

No easy task. Like Webvan’s Swan, Lien says it’s crucial he stay on top of key fulfillment metrics, including pick-and-rate numbers for product groups. BlueLight will monitor SubmitOrder’s key fulfillment metrics, including pick wave results, order status, and outbound order flows. To monitor the outsourcer’s performance, Lien will look at real-time data feeds between SubmitOrder’s warehouse and BlueLight’s Oracle order management system. “I’ll check to see if the right items got picked and packed,” he says, “and if the customer received the right items.”

Even a small mistake can gum up the works. Customer service representatives are forced to get involved. Data must be manually corrected. A returned item has to be processed, the correct item ordered, then shipped. Meanwhile, the clock ticks — and no cash comes in from the sale. “That’s the stuff,” concedes Lien, “that blows away our financial metrics.”

Lauren Gibbons Paul is a contributor at eCFO.

Next-Day Delivery is for Sissies

If you think you’ve got your hands full making sure your company gets products to customers within 24 hours of order, consider Larry Svoboda.

Until October 2000, Svoboda was CFO at Urbanfetch.com Inc., an online company that tried to deliver a wide array of products to shoppers in New York and London. The service was free other than for the price of the items. But Urbanfetch’s big selling point — and what made Svoboda’s job so taxing — was that consumers could elect to have their orders delivered within one hour.

A tall order — apparently, too tall. In October 2000, Urbanfetch ceased operations. It’s not hard to see why, either. The delivery process at Urbanfetch looked like something out of the Keystone Cops. When customers placed an order on the Urbanfetch Web site, the request passed into the order management system, which sent a ticket to the warehouse floor. If the ticket was for a one-hour-delivery order, Urbanfetch warehouse workers got the order picked, packed, checked and ready for delivery within five minutes — yes, five minutes. Then, depending on the type of product to be delivered, Urbanfetch delivery workers either jumped into a van, set out on foot, or pedaled off on a bike to deliver the item within the critical 60-minute range.

Remarkably, Svoboda was able to stay on top of this madness. In fact, despite Urbanfetch’s demise, CFO’s can learn a thing or two from Svoboda’s dogged monitoring of Urbanfetch’s fulfillment system. His bedrock metric: average pick-pack time per hour, which was already tracked by logistics and operations managers. The Urbanfetch CFO also eyed the number of deliveries per messenger per hour. The goal was for each courier to make between three and four deliveries per hour, regardless of transportation. Svoboda also monitored consumer satisfaction, with an eye toward customer retention.

Despite the helter-skelter pace, Svoboda appeared relatively calm during an interview with eCFO conducted just weeks before Urbanfetch shut down. “It’s very intense,” he conceded at the time. “You just have to live with it and make it work.” —L.G.P.